I will update this post after the hearing in an hour or two.
UPDATE: Vennes pled guilty to two counts. Will cooperate. Out on bond awaiting sentencing.
UPDATE: The MN DOJ Press release:
Frank Vennes pleads guilty to lying to investors in Petters’ Ponzi scheme
MINNEAPOLIS—Late this afternoon in federal court in St. Paul, a business associate of Thomas J. Petters, the Minnesota businessman convicted in 2009 of orchestrating a $3.65 billion Ponzi scheme, pleaded guilty to fraudulently raising money from individuals and through hedge funds for investment in Petters Company, Inc. (“PCI”). Frank Elroy Vennes, Jr., age 55, of Stuart, Florida, was charged on July 11, 2011, in a Second Superseding Indictment. Appearing today before United States District Court Judge Richard H. Kyle, he specifically pleaded guilty to one count of securities fraud and one count of money laundering.
Following the plea hearing, U.S. Attorney B. Todd Jones said, “This case exemplifies one of the highest priorities of this office — protecting our citizens from financial fraud. Because of the tremendous dedication of this office and our investigative partners, we successfully constructed a very strong case. We were able to convict Tom Petters, the biggest fraudster in Minnesota history, who is now serving a 50-year sentence in Leavenworth. We also successfully prosecuted many of his associates, and today, yet another individual pleaded guilty. We are taking action to recoup the financial losses suffered by so many because of this fraud and know the court will appropriately sentence Mr. Vennes for his related crimes.”
FBI Special Agent in Charge Chris Warrener added, “This guilty plea today symbolizes the ongoing joint efforts between the FBI, the U.S. Attorney’s Office, IRS-CI, and the U.S. Postal Inspection Service to combat significant fraud in the State of Minnesota. It also reflects our continued joint commitment to ensuring that those responsible for the Petters fraud are held accountable.”
From 1995 through September of 2008, Vennes and his company, Metro Gem, obtained money from others for investment in PCI notes. He also assisted in the formation of hedge funds, known as the Arrowhead Funds, to help raise additional investment funds for that same purpose. Beginning in 2001 and proceeding through September 24, 2008, he knew that individuals associated with the Arrowhead Funds were making misrepresentations and omissions to investors regarding investments in PCI, and he aided and abetted in those misrepresentations.
“This complex investigation shows that the appearance of success can be a mask for a tangled financial web of lies,” said Kelly R. Jackson, Special Agent in Charge of the St. Paul Field Office of the IRS-CI. “Ponzi schemes can thrive for a long time because of the false representations about the investments that were made to investors. But that time is gone, and as Mr. Vennes’ plea shows, it’s time for those responsible to face judgment.” PCI was owned and operated by Tom Petters, who, in or before 1993, initiated the Ponzi scheme by representing that funds invested in PCI promissory notes would finance the purchase of electronics and other consumer merchandise. Purportedly, PCI would resell that merchandise for a profit to certain “big box” retailers, including Sam’s Club and Costco. In truth, however, no merchandise was bought or resold. Instead, Petters diverted hundreds of millions of dollars for his own benefit and the benefit of his co-conspirators.
Petters’ Ponzi scheme unraveled in 2008, when federal agents executed search warrants at his business offices as well as other locations. He was subsequently prosecuted in federal court in the District of Minnesota and, in April of 2010, was sentenced to 50 years in federal prison. He is currently serving his sentence in the federal penitentiary in Leavenworth, Kansas.
In his plea agreement, Vennes admitted that he raised funds for investment in PCI notes through third-party agents, particularly after 1998. Because he had a federal criminal record, having been previously convicted on federal narcotics, firearms, and money laundering charges, he had difficulty obtaining funding on his own. As a result, he regularly worked through others, especially when trying to solicit money from banks and institutional investors. Arrowhead Capital Partners II, L.P. and Arrowhead Capital Finance, Ltd., collectively known as the Arrowhead Funds, were among those third-party agents.
From 1999 through September 2008, all paperwork and communication between PCI and the Arrowhead Funds went through Vennes or one of his employees. At the same time, Vennes received “commissions” from Petters for brokering deals involving the Arrowhead Funds. His commissions were based on the amount of money he raised for Petters and PCI. Between 2001 and 2008, Vennes received more than $48 million in commissions.
During that same time period, Vennes knew that those acting on his behalf were making material misrepresentations and omissions to investors in the Arrowhead Funds and did nothing to correct the situation. Investors were told, for example, that whenever a retailer purchased consumer electronics or other goods from PCI, those products were paid for by the retailer with funds directly deposited into a bank account under the control of a management company. Thus, investors were falsely assured that all PCI transactions were, in fact, taking place, and all money was secure. However, Vennes, among others, was well aware that no payments were ever received from retailers and, instead, came from PCI alone. Furthermore, investors were never informed of Vennes’ criminal record or his involvement in the Arrowhead Funds’ transactions. And, finally, they were kept unaware that in late 2007 and early 2008, the PCI Notes held by the Arrowhead Funds were delinquent and were approaching default. Instead of disclosing that information to investors, Vennes and others arranged to secretly extend the due dates on the notes, the intent being to conceal the payment problems and to lull investors into believing their investments were secure and performing well.
Vennes’s co-defendant in this case, James Nathan Fry, age 59, of Orono, Minnesota, was charged with five counts of securities fraud, four counts of wire fraud, and three counts of making a false statement to the U.S. Securities and Exchange Commission during its investigation of investments in PCI by hedge funds under the management of Fry’s company, Arrowhead Capital Management. His trial is scheduled to begin on February 5, 2013. For his crimes, Vennes faces a potential maximum penalty of ten years in prison on the money laundering count and five years on the securities fraud count. Judge Kyle will determine his sentence at a future hearing, yet to be scheduled.
If convicted, Fry faces a potential maximum penalty of 20 years on each wire fraud count and five years on each securities fraud and false statement count. Two Florida hedge fund managers have pleaded guilty to committing fraud in connection to this scheme by making material misrepresentations to investors in their hedge funds concerning investments in PCI. David William Harrold, age 53, of Del Ray Beach, Florida, and Bruce Francis Prevost, age 52, of Palm Beach Gardens, Florida, await sentencing, each on four counts of securities fraud.
This case is the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service–Criminal Investigations, and the U.S. Postal Inspection Service. It is being prosecuted by Assistant U.S. Attorneys Timothy C. Rank, Kimberly A. Svendsen, and Robert M. Lewis. This law enforcement action is in part sponsored by the interagency Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive attack on financial crimes. It includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement, who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force hopes to improve efforts across the federal executive branch, and, with state and local partners, investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.